Alan Kring Productions in association with the Emergent Lights Studio presents
the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.
This is Business Finance, FIL 240 for spring semester 2024.
Today, accounting financial statements.
And then you will have a quiz that will, I'll stop at 1.30 and then you'll have that surprise quiz I promised you.
And then when you're finished with that, you are definitely free to go for the day.
But first, I'll look at the numbers. And if we look at the numbers and think about those numbers, sir, is this a bull or a bear day?
Bear day.
Bear, yeah, it's a bear day. It's not spectacularly bad, but you definitely see a lot of red there,
which is an indication that the consensus is that it's not very good.
But most of it looks like there was, there's disappointment with earnings that are being released by the big techs.
And that's about the bulk of why the bears are having a party day.
If you can see, it's pretty consistent. The Dow is pretty much almost flat, down 0.03 percent.
And then higher risk portfolio, the S&P 500, down more, about three quarters of a percent.
And then, not surprisingly, the higher risk NASDAQ portfolio is magnifying the down stroke even more at a one and a quarter percent down.
So you can see that comp, it's not always that way, but it is very typically that way.
You see the risk magnifies as the risk increases on the portfolio.
And that's not, nothing surprising about that.
And crude oil, as I had said, I've said this several times, that it bounces around.
You notice that it's been falling today, but tends to like to stay in that trading band from 72 to 79 per barrel on the benchmark light suite.
Brent. And so there it is in there.
Gasoline prices aren't going to go anywhere, quite fortunately, not up at all.
But there's not enough down stroke there to really see gas prices lose, go down much either.
But it's stable right now. How long it will stay stable, we'll see.
We are anticipating a retaliatory strike by the United States on an adversary's actors in possibly Syria or Lebanon.
And that may rattle the markets a little bit and it will really honk off Iran.
But Iran isn't stupid. It's not going to shut down its oil production because it's just shooting itself in the foot by doing that.
It still could cause oil prices to rattle up a bit on the higher risk of shipments.
But anyway, the gold bugs had a day. They got all kinds of happy and excited about the prospects for some kind of war or escalation of the tensions in the Middle East.
Now, I want you to know something. Ten-year bond. Remember, these are the yields.
The price would be going the opposite way. So we see the ten-year benchmark treasury yield falling,
which means that the price would be going up, which means that the investors are buying the bonds.
Buy the bonds, demand goes up, price goes up, and that causes the yield to fall.
Now, notice over here, we've got a day that's pretty much a flight to quality.
Remember, I said from stocks to bonds, bonds to gold and all that kind of stuff.
Flight to quality, investors are moving significantly from riskier assets, riskier investments to lower risk investments.
And sure enough, see, there's some kind of worry about where things are going with the stocks.
They are shedding price. So as the investors sell, the sale of those causes the prices to fall.
So they're selling, they're getting money, and not surprisingly, they're moving into bonds.
Bond price is going up as the investors take their funds out of stocks, driving those prices down,
and put it into the safe harbor of bonds, and that pushes their prices up and therefore their yields down.
And even more evidence is gold is going up too.
So investors are moving to an even safer harbor with some of their funds.
They're getting out of the stocks the riskiest, moving it to the lower risk bonds, and moving it to the even lower risk gold,
or at least the safe harbor of gold. So that's a classic flight to quality day.
If it lasts for more than a few days, you begin to kind of worry a little bit.
But I don't foresee that happening here. The markets are just in a grouchy mood right now.
If you look at it, the standard point is a good one to look at.
Do you see how the big drop was right at the opening bell there?
Well, matter of fact, let me expand that.
Right there at the opening bell, see, there was a big drop off, a steep drop off, and then from there it just kind of bounced around.
The bad news was overnight, in the overnight market and the premarket, earnings aren't going to be that spectacular.
So the investors started dumping real quickly in the morning, and they kept getting rid of more as more earnings expectations soured.
But once that was gone, it just sort of bounced up and down. There wasn't any more direction downward.
That is classically what information is all about.
Information gets quickly impounded, as we say, in prices of securities, and then if there's no more information, it stays flat.
In this case, it was sort of chaotic. When you see that, that means that there are some who are thinking it's still going to get bad.
Those are the bears. And then the bulls come in. They think it's over, and they buy in.
So you get this choppiness when there's more uncertainty, but it didn't have too much of a direction there.
I mean, you could argue kind of like it was getting a little more positive than negative in here.
It'll still finish down for the day, most likely.
But notice also the volume, we're a little more than halfway through the day now, and the volume is actually quite thin.
On a typical day, about 4 billion shares trade. So far today, less than 1.5 billion.
So there are a lot of players staying off the field right now. They're just holding onto their positions.
They're not doing anything. That's why you see this light volume.
That would tend to mean that the heavies are not playing today. They're going to see what happens once the battlefield becomes a little clearer and the smoke goes away.
Smoke of uncertainty goes away. Not that surprising.
But anyway, moving on here over to where the heck was I going?
Tokyo, not a spectacular day at all. It started out sour like ours did.
But as you can see, as the day moved along, less and less bad news, more and more positive news.
And so it groveled out of an initial down, and it finally made it up about what? About 0.6%.
But London, on the other hand, London just kept, it had positive for a while after a little bit of a negative start.
Positive information, nothing spectacular.
But then the bears came in and smacked the crap out of it, and it ended up down about 0.5% for the day.
And then that's sunset in Tokyo, rose in London, sunset in London, and it rose here in the U.S.
and the U.S. had its own take on economic prospects.
That's nothing big about that.
Looking at a couple of stocks just to keep you on board with that, and I'll come back to this company in a little while.
This is United States Steel, U.S. Steel. Just have a look at something.
Oh, hey, hello, Kitty. Wow. Didn't expect to see that.
Okay, just to make sure you know, again, if you want to buy a share of U.S. Steel, you'll pay $48.06.
If you want to sell a share of U.S. Steel, you'll pay $48.05.
The bid is what you pay to buy it. The ask is what you'll get if you sell it.
That's a very tight bid-ask spread, which is actually surprising.
Look how weak the volume is today.
That's more of a reflection of that overall market weakness.
There's not a lot of activity. The big dogs are staying off the playing field.
So a typical day, about 6.5 million shares.
Today, more than halfway through the day, only about 1.2.
I wouldn't be surprised if they end the day at no more than about 2.1, 2.2 million shares.
A third of the typical volume for U.S. Steel. Not surprising.
Now, over here, well, first of all, U.S. Steel is profitable, 4.64%. No doubt about that.
Strong company pays a dividend. It's nothing spectacular.
A 20 cent per shares check, which is.42% overall.
But if you look here, it's your turn to do this one.
What would you say, sir, is this a risky or a not risky stock?
Look at the beta.
Okay, let's try. What do you say?
It would be risky.
Yes, very risky. At 2.07, that's blinking.
I mean, above 1.25, you're saying it's risky.
When you get up to 1.75, you're saying, uh-oh.
And above 2, you're saying, yeehaw, this is a ride on a wild animal.
2.07, that's very risky for a basic industry stock like a steel.
That's surprising.
What may explain some of that is that steel is a competitive product.
We compete against other countries that make steel,
and they use technologies that we still aren't quite mastered, haven't quite mastered yet.
So that is a competitive industry.
But I mean, at 2.07, I'm almost at a loss for that kind of a risk.
Now, as far as valuation goes, if we wanted to try for the valuation part of this,
madam, is this an undervalued, overvalued, or about intrinsically valued stock right now?
What would you say?
You're saying it quietly enough that I'll pretend you said undervalued.
You're right, it's undervalued.
It should be about price divided by earnings.
It should be about 30.
That's my judgment, some say a little less, a little more, but 30.
So in other words, in this one, at 10, this start, the price,
and the price divided by earnings is lower than normal,
which means that if it wants, if it's going to move toward 30,
that would tell us that the price will appreciate.
We will, right now, it's undervalued.
It's a high-risk stock, no doubt about that.
And at the same time, it's undervalued, which is the other side of it.
So, I mean, if you want to take a, put something high-risk in your portfolio,
there's this because it also is giving off at least one indicator
that it has some potential for price movement upward.
It's undervalued right now.
There you have it.
Let me show you two quick stocks.
And this is where I go in that warning.
You may be able to find it.
I tried to go into Google News myself, and it didn't work.
This morning, Google News had one of those they consider to be a famous
and great site for people, for small-time investors,
one of those sites that is great to take their advice, as it were.
It's called the Motley Fool.
And they are, well, let me show you.
They said, here, they said the big industry for the future,
where all of the great investments will be, is AI.
Well, duh.
But at the same time, AI is a very generalized term for a lot of things.
And about every company worth its salt is in the race with AI.
Google is just massively investing in it.
IBM obviously is.
That's where I get my certifications.
And there are other monster players in there, too, OpenAI and all that.
But they said, here's the stocks we think, if you want to get in
and make money on stocks in AI, here are the ones you should do.
Both of those stocks really have not that much to do with AI.
It shows our first level of stupidity.
But here are the two that they recommended.
One that they recommended is Nvidia Corporation, NVDA.
NVDA.
Some of you, if you're into computers or gaming,
you would recognize them as the ones for the video cards and like that.
So let's look at NVDA and see if the motley fool is a good place to look.
What strikes you right off the bat about the stock that tells you not a good idea?
Madam, what do you see?
The beta is wonderful, like, 6.4.
Is that a good investment for a regular? No.
That's a risky investment. Go.
It's a value.
Oh, God, yes. Exactly.
That's the second thing.
There is nothing.
Yeah, it's a profitable company, $7.60 a share.
It pays a lousy dividend of 16 cents a share.
But the screaming things are appropriateness of investment.
This is not an appropriate investment for anyone who doesn't want to take a risk of losing your butt.
It's overvalued.
At 80, it may be as much as two and a half times overvalued, the price.
And with that beta up there in the stratosphere,
this isn't a proper recommendation for investors who are looking for help,
learning how to invest, who don't know how to read numbers themselves.
This is irresponsible as hell.
Now, let me show you the other one that they said.
Advanced micro devices, AMD.
It doesn't even have a beta anymore.
The last beta that it reported was around, I think, above two.
And you can see right now it's so overvalued.
I mean, you don't even see price-earnings ratios that high.
That's just not natural.
That's not normal to see that much overvaluation.
Here they are.
You can't even assess its risk because the beta is not being reported now.
And if you want to go and look at valuation,
this is clearly massively overvalued where it is now.
This has downside potential to possibly $50 a share.
In other words, you could lose your ass on this stock.
And there's a good reason to believe that you will.
But neither of these companies, they are computer companies.
Yes, given that.
AMD makes chips.
It competes against Intel, which isn't a good idea.
If you're going to go out and compete,
you might want to not go out and look for a MechWarrior to fight against.
And the other thing is that it really isn't anymore.
It's not even heavy in AI compared to the beasts like Google and IBM and OpenAI
and a lot of small, scrappy companies.
The truth be told, that investment in artificial intelligence,
well, yeah, you should invest forward-leaning investments.
But the ground is cluttered right now.
There are thousands of companies of all sizes competing.
And the reality is that it is terribly expensive if you are an originator of artificial intelligence,
not just someone who uses it or makes chat GPTs,
but if you are an originator, an innovator,
it costs a fortune because you've got to have massive computer storage space in the cloud
and you also have to have incredible software to be able to play with that computer,
those computer resources in the cloud.
And not a lot of companies have that.
They're just barely catching up.
As a matter of fact, when I was doing certification,
there were companies you might even recognize that had their gurus in the training.
So, yeah, not a good idea unless you really know something about the companies themselves
and what their resources are and what talent and skill,
as far as human resources and computing resources, they're bringing to the table.
That's how you ask the questions.
And you always want to be awfully cynical about recommendations or even companies themselves.
All these companies right now are saying, our software is AI generated.
It's a marketing term.
They wouldn't know artificial intelligence if it smacked them in the butt with a robot.
Anyway, okay, now let me get down to the meat today.
This is a lecture where I am supposed to teach accounting.
And I assume that you've had your accounting 131 at least.
But I come into this lecture knowing that I have to teach accounting.
And that means that I go down that hallway thinking,
do I want to do this or do I just want to kill myself?
And generally, so far I've made it my goal to make it to the classroom.
But starting this off, what I teach you about accounting,
it's not going to be debits and credits.
I'll mention things like that.
And I'm not really excited about whether you get it or not when I say,
well, you debit the cash and your credit.
But I'm talking about using accounting information,
not making, building financial statements.
That's someone else's job.
But just to start it off, accounting is a career or a skill set
or whatever you want to call it that creates a product.
Now, within it, it's actually a product line that accountants create.
They create a set of information products.
They make those for a variety of customers, of consumers.
In our world, we call them constituencies.
Accountants create information products for a variety of consumers of that kind of information.
So, for example, the accountants will produce their information products
for upper level management.
That's one of the things that they'll do.
One of their customers, their constituencies, as it were.
They will also produce some financial statements,
possibly somewhat different for a consumer group called investors.
But in that group, there are actually two kinds.
There are prospective investors, in other words, ones that may become investors.
And then there are actual existing investors,
those who already have a shareholder stake or a bondholder stake in the enterprise.
So there's another couple of constituencies.
Those information products are also made for constituencies that are related to the government.
The federal, state, and possibly even municipal governments are consumers.
Those products.
And then those information products are made for other constituencies,
maybe not directly, but other constituencies utilize them.
For example, outside special interest groups, environmental groups,
or consumer safety groups, what have you,
or rabble rousers, political groups, outside constituencies of a variety of kinds
will have their hands on them and use them for their purposes.
Then the unions may use them in negotiations, those financial statements,
those information products.
So the accountants are producing information products for a lot of different interests.
And I say interests because each of those constituencies probably has somewhat different goal
in looking at those financial statements.
Okay, I've gone through that.
It's a little bit different take from what you would hear in an accounting class.
I sit on the outside as a finance professional.
I am a consumer constituency.
I am somewhat different from others because as soon as I get those financial statements,
I have to start twisting them and turning them, throwing things out,
and putting things in so that they have meaning to me because accounting information is historical.
It is what has happened for the year 2023 as of December 31, 2022.
That is information that has already happened.
And for finance people, it means nothing because we need to know what is going to happen
because that is where valuation of the company is done.
We value a company now not about what it has been, but what it is going to be.
I look at you, sir.
And I see a young person, probably a troublemaker, a ne'er-do-well, a scoundrel, and all that.
But my job as a professor is to see what you can be and to create value for you now
based upon not what you have been.
For all I know, you are a murderer or an arsonist.
I don't care. I actually don't care.
I've taught in prisons where there were people who did awful.
I mean, they told me what they did. It was awful. My God, you did that.
Oh, I hope I give you a good grade.
No, but I'm working to create something out here that is a value.
And that's what we are trying to do in our work in finance.
And that's what you'll be doing too in your work.
I'm not teaching you based upon your history.
I'm teaching you based upon your potential.
And that's what we do.
So we have to take those information products that are created outside of us,
and then we have to tailor them to what we need.
So I bring you, sir, to dinner, and I'm making mac and cheese.
Now, it's my homemade macaroni and cheese,
and I'm not saying it's the best in the world, but it's the best in the world.
But I'm not saying that, even though it is.
Now, I feed it to you, and I bring you in, and I bring you in.
Now, you look at this. Oh, this is bland. I'm going to put hot sauce on it.
I had a hot sauce once, just a little touch. It was called Death by Stupidity.
Yeah, it was.
Okay, now you, sir, this is bland. I want salt on it.
And then you, sir, might say, well, you know, it's kind of not cheesy enough,
so you put a lot of cheddar cheese, mix it up.
We're going to tune it to what we want.
We're going to take the bland product and make it into something that is usable, palatable, tasty to us.
So always keep that in mind when we're doing accounting.
And this is, again, nothing against accounting.
Accounting is probably the reason we have a global commerce system at this day.
I'll tell you about that in another lecture.
But anyway, now, and I'm going to take this even a little step further when I talk about financial statements.
How do I, how do I start it?
See, when you were in your accounting class, you were probably exposed to the financial statements,
the income statement, the balance sheet, statement of retained earnings, statement of cash flows.
Actually, there is one that is the core statement.
All of the other statements are side calculations for one of them,
except there's one that I should note that's sort of a side on its own.
The balance sheet, that is the actual core statement.
The balance sheet is, you may, I don't know if you'll remember or not,
but they said the income statement is a flow of cash, the balance sheet is a stock, is a reservoir, as of a specific date.
And others think about the balance sheet as the lake, and into that lake flow rivers.
In this case, it is a lake of information, a static body of information, as of a specific date.
But into that lake, that lake is filled with information by the other financial statements.
Going in like this, the first one that fills the lake is the income statement.
And actually, it kind of comes down this way.
The income statement, revenue minus cost is your operating income, EBIT, minus your interest expenses,
earnings before taxes, your pre-tax, minus your taxes, is your net income.
Well, that flows down to the statement of retained earnings.
Down there, where you have your beginning, oh well, you have your capital stock paid in.
Then you have your beginning retained earnings plus your income, net income, minus your dividends.
That becomes your, ultimately this plus this minus this, becomes your ending retained earnings.
Now, don't sweat too much. This is in the book, you can read it.
I'm not going to beat the hell out of you on a test or a quiz too much about this.
But do understand that then the statement of retained earnings goes up here to the stockholders' equity section of the balance sheet.
And it doesn't end there. Over here, you have your statement of cash flows.
And basically, it starts with your beginning cash, which comes from the balance sheet.
And then you have these pluses and minuses in there, and I'll talk about that in a minute,
adding in and taking away things that actually happened that weren't on the income statement.
And then you have at the end, your ending cash.
And that flows to the top line of the balance sheet.
The balance sheet is nothing but a collector of the information that is done in these side calculations on these other financial statements.
By the way, just as a historical note here, there was an old term for the statement of cash flows that I kind of like better.
I sometimes slip and use it. We used to call it the sources and uses of cash statement, or the sources and uses statement,
because it tells where money came in or didn't come in and where money went out or came in someplace.
And I'll show you all this in a minute. But all of these are pushing into the balance sheet to create it.
That's why it's sort of like the end product of all those other statements.
Not just another statement, it is the summary of all the other statements.
Now there's one that is not emphasized in your accounting classes, early ones, too much.
And I learned that it's actually a powerhouse of information.
And it's also a good place to put things that you don't want people to notice too much.
The notes could go on and on and on.
But hidden in the notes to the financial statements are all kinds of details.
Details about executive compensation.
Details about like stocks, stock options and all that, that executives are given, stocks that they're given,
stocks that's in ESOPs and stuff like that.
And other information about leases, the company, where it has liability exposures and leases, what the details of them are.
The notes are actually, if you are into analytics, they are like this candy land of information that
once in a while you hit something and you say, what? Where is that in any of the other places?
You don't really see it anywhere else, but there it is, parked in those notes, hiding.
I was even advised when I was in consulting by a compliance officer at the NASD
that you could use the notes to the financial statement to warn investors away from the company.
And then if the investors went to lawyers or tried to take you to court, you could say,
it said it right here in these public documents.
So there's where we start.
And again, this is not an accounting class and I don't need you to worry too much about you
doing a lot with the actual debits and credits and all that.
The book is pretty merciful about that too, I think.
But I do want to point this out.
In finance, as I've told you before, we don't care at all about profit.
Profit means nothing to us in finance. It really doesn't.
And yet all you hear about in the news media, well, they were profitable.
You even hear me say, well, they're that company, it's profitable.
See, earnings per share is positive.
But it really doesn't matter to us at all.
And I can speak to that in theory and I can also speak to it in practice.
I ran companies and I have been the owner, the boss of companies.
And I had companies where they were profitable.
But that didn't mean on Thursday night when I was writing payroll, I wasn't sweating bullets.
In some cases, I had to take money out of my own account to put into the company account
just so I could make payroll.
The company was profitable. I could brag about it.
But I knew on Thursday night the real problem happened.
I actually had to use cash, which isn't in the income statement.
Let me give you an example. And this is from my current business.
I'll just give you an example to make a broader point.
And this broader point you need to put in your notes is classically something I'll do on an exam or a quiz.
Not this one, but later.
Okay, now, as I hope you know, I run a company.
It's a corporation, an S corporation. It's called Emergent Light Studio.
I create and sell artworks and photography.
Now, I go to, I sell on Amazon. I have my own Amazon storefront.
I sell through a couple of other e-commerce solution platforms.
But I also go to art shows and exhibits.
Arts festivals where I sell my art alongside other tents full of gypsies, tramps, and thieves
selling everything from soy candles to leather belts.
Now, take a, and I'll just give you a great example from early this year.
I went to an art show. My art is expensive. Big, gorgeous works.
You can't buy them. You can't afford them.
But I had, it's not that unusual for a customer to come, for someone to come in.
Just staring at the art and usually they'll stop on something.
If they're really into art, something will catch them.
And of course, then I have to play my game.
The brooding, always depressed artist who's just trying to express his feelings through his art.
And I'll see something, I'll go up quietly and I'll say, you like that, don't you?
Okay. Where would you put it?
Do you have a place for it? Kind of.
Okay. Well, would you like to buy it?
Well, I can't afford this. It's $1,200.
That's where I play.
Okay. I've got financing.
$400 now and $800 over the next six months.
I can sometimes make a sale on that.
Not always, but sometimes. Okay. Here's the thing.
On my income statement, I am going to report $1,200 revenue.
That is a lie.
I did not have $1,200 in revenue.
I had $400, well, I had $1,200 in revenue, but I had only $400 in increased free cash flow.
The rest went over to the accounts receivable.
So I had $1,200 revenue and that was broken down between a debit of $400 to cash
and a debit of $800 to accounts receivable.
I didn't have the $1,200.
The IRS, the SEC, the Lord himself, they want me to put $1,200 down and that's not what happened.
So in other words, what we're saying is that if I look at the balance sheet,
actually the statement of cash flow is first, I will see that current assets went up.
The account receivable went up.
But that means that relative to the revenue, my free cash flow went down.
So when a current asset goes up, that means that the, excuse me,
that means that I lost that much money relative to the revenue.
See, the revenue is at $1,200, but I lost $800 of that, relative of that,
into an account, into a current account, the accounts receivable.
So when accounts receivable go up, that means that relative to my income,
I have had free cash flow fall by that amount.
And now, six months later, I get my $800.
Well, that means that current assets, I credit out the accounts receivable
and it washes, 800, 800 washes, and so then I have $800.
It's grand slam at Denny's tonight, yes it is, free cash flow pops
because I killed the account receivable with real, live money, and so free cash flow goes up.
So whenever I see a change in accounts receivable or any current asset, they all work the same way.
The change in free cash flow is opposite that.
You get this in your notes.
I mean, I'm not saying you should, but it would be a very attractive tattoo.
Okay, or not, maybe, okay.
Now, let's take the other side of it.
Let's take the other side of it.
You, madam, I decided that I'm going to hire you to help me with my art shows.
Now, we have to haul about 1,200 pounds of setup and artwork, and you'll do that job.
And for an art show for two days, I'm going to give you $300, $100.
But hey, you could say I work for an artist, a stupid artist, but yeah, anyway.
Okay, now, as soon as the show's over, I can write expense of $300, right?
But I'm not going to pay you.
Do you think I'm stupid?
I'll wait.
I'll wait until next month.
I'll catch you next month.
You'll say, no, wait a minute.
You asshole.
No, you understand that I am going to say, and I am legally and even morally obligated to say,
I paid wage expense $300.
But okay, I'll give you $100 of it, whatever.
So in other words, my cash was really $100 out.
My account payable, though, my wage is payable, went up by $200.
So in other words, even though I claimed I spent $300 relative to my operating expenses, I did not.
So when a current liability goes up, that is a release relative to operating expenses.
So I gained free cash flow over what I said.
I said $300.
I put $200 of it into accounts payable.
So that means that relative to what I said, my free cash flow is up $200.
You follow?
And of course, it works the opposite.
You come back to me and you've got a couple of very large guys with ball bats.
Okay, easy.
Here's your dang God buddy, too.
Sheesh.
No respect for art.
Okay, then at that point, nothing is happening on the income statement.
Nothing at all.
I've already done the, I've already expensed the $300.
However, I now that I've paid you, I will get rid of that current liability.
And that means that my current liabilities will fall by that $200,
and that will smack my free cash flow by that much money.
So there it is.
Get that in your notes.
Get a tat if that's what you're into or something so that you remember this trick.
I do, I ask something about this on a quiz or a midterm or a final.
It's just a kind of a classic, you've got to ask this.
And it's actually the logic, I'm giving you the logic behind it.
If you don't want to do that, then just remember that little chart right there.
But, and that's the reality of it.
Now, it gets even worse, and we're going to get into this in just a minute here,
and we'll do a little more on Monday.
I'm pushing off your homework due dates here.
But think about depreciation.
Is it me or does the water here taste horrible?
I mean, where do they get their water from?
Ass Lake?
God.
That ran through the pig farm on its way here.
Okay.
Oh, I know.
Let me tell you another one just for my company.
Anymore I do, most for photography I do landscapes and some work on spec.
But I used to be much more into product and model and portrait photography.
I don't do any more because I learned how to really hate people doing that work.
But here's the thing, you've got to have very expensive equipment.
If you're going to be, call yourself a professional.
You're not going to whip out your stupid ass phone, click, click.
You're going to do weddings with big camera lenses to impress them,
and extraordinarily high resolution that can be made into big pictures and all that.
Okay.
A few years back, three or four, I bought a new portrait lens.
$4,500.
Yes, one lens out of what we call, I have the holy trinity of lenses.
But it's a big monster.
You might see me bring it in here sometime for some gig I've got here in the building.
But $4,500 went out of my pocket right there and then.
My free cash flow took a hit of $4,500.
Okay.
I'm not allowed to say minus $4,500 on my operating expenses.
I'm not allowed to.
The term in accounting is I must capitalize that cost and then depreciate it over a period of years.
To make it simple, it was a five-year depreciation life, depreciable life.
And if I'd straight-line, that means it would have been $900 minus $900 depreciation expense
in each of the five years of it.
That's not what happened.
There was no $900 ever anywhere in this thing.
You just have to do it by the rules, which means that depreciation expense on an income statement is a lie.
It doesn't happen.
It's not there.
What really happened is $4,500.
So in other words, when I talked about we have to twist and take things out, add things back into income statement,
there's one of them right there.
But I have to be cautious about that.
I have to let the depreciation stay until after I've calculated my taxes.
Because you see, think about it this way.
I have revenue.
I'm minus that $900, even though it didn't actually happen, it takes $900 away from what I calculate for taxes.
So if I had, let's say, $10,000, instead of $10,000 times my tax rate, it's 10,000 minus 900 times my tax rate.
So even though the depreciation expense doesn't exist, it actually creates a real, what we call, tax shield.
It actually shields some of my revenue from taxes.
So in other words, I can't just, well, there it is in the cost, pull it out.
No, I have to wait until it has had its tax shield effect.
And then once that's out of the way, then I have to add the depreciation expense, that plus 900, back in to see what cash flow is really doing.
Now, when I first do this, don't sweat if I'm talking fast and it doesn't all make sense.
But let me show you something right here.
I'm going to do something.
You are going to have other courses here, and when you go out there into the real world, you're going to interact with financial statements in one capacity or another,
either as investors or for your company or something like that.
And certainly here, you're going to have term papers and assignments in other classes where you'll need to use financial information.
There is one and actually only one public resource that is a primary resource for the financial statements.
I want you to look right here.
See, Yahoo?
I could click here for AMD and get the financials.
That's not a primary source.
It's also not reliable.
And I'll explain that in a minute.
I'm not that I'm fibbing you, but okay, the only primary source for your financial statements is the Securities and Exchange Commission, the SEC,
because you see every public company must, on a regular basis, submit its financial statements to the SEC.
I used to do this many years ago when it was on paper.
Now it's all an electronic system called EDGAR.
We all have to do it.
Submit them and they're uploaded.
And then from there, anyone in the world can see your financials, because not only are they there,
the SEC requires that you provide them in Excel format.
You can download this.
I'll show you where it is, and we'll do it a bunch of times so that you'll get used to it.
All of the financial statements in Excel form.
You don't have to key in data.
You can make pretty charts and graphs, do worksheets with special calculations,
which you'll see us do in this course when I start stepping into the world of Excel more starting next week.
It's just awesome what you can pull off, and it's all there.
Now, back in my time, financial statements could lie.
They were, I mean, it was just basically just the ethics of the corporation that govern how truthful they were.
That all came to an end with a couple of massive financial statement lies that turned into destructive scandals
that ruined lots and lots of people who were investors, who were workers for these companies.
One of those companies was Enron, another one was WorldCom.
Congress cracked down in the early 2000s with an act that's commonly called Sarbanes-Oxley or SOX.
SOX made it so that every officer of a corporation and director must personally sign assuring the truthfulness of those financial statements.
What that means then is if there is a material misstatement of fact,
the SEC can levy civil fines not just on the corporation, but on every signatory to those.
And if it's egregious enough, the SEC can refer the matter to the Department of Justice for criminal prosecution.
It's that serious.
So there's a whole lot of, gee gosh, we better make sure these are right.
Not just the accountants, but also the officers and directors so that they can't say,
well, I don't look at those, oh, it doesn't matter whether you did or not, by law you signed that you had.
And so it's created a lot more reliability and integrity in the financial statements themselves.
In other words, the rule of law has a fist.
And this is something that's a big issue for all of us in the business, is trusting the rule of law to tell us in a country.
And when I work in these other countries talking to their ministries of finance about what it's going to take for them to be elevated
so that they can step into the league where there's huge amounts of capital ready and waiting to help them,
it will be there when we have the assurance that the rule of law is in operation in those countries.
And a lot of them kind of like, yes, but, or, well, you don't understand,
or the one that kind of hurts is when they say you're imposing, you're bringing neocolonialism back to us by putting your standards on us.
Granted, fair enough, but at the same time, when they need $2 billion to extract an insane amount of a mineral
from the ground in that country that will improve everyone's life, well, you play by our rules and that'll happen.
You decide that the rule of law is just for the common people and not for the wealthy, well, then it ain't going to happen.
I will finish this on Monday, this lecture, but for now you have a quiz to take.
And it is right there in Canvas waiting for you, and when you're finished with it, that's all I have for you today. I thank you.